Steffen Kindler - Head, IR François Roger - CFO

Warren Ackerman - Societe Generale Jean-Philippe Bertschy - Vontobel Eileen Khoo - Morgan Stanley Celine Pannuti - JP Morgan Martin Deboo - Jefferies Jon Cox - Kepler Cheuvreux Adam Spielman - Citi Patrik Schwendimann - Zürcher Kantonalbank Alain Oberhuber - MainFirst James Edwardes Jones - RBC Jeremy Fialko - Redburn Ralph Atkins - Financial Times Silke Koltrowitz - Reuters

Good morning, everyone, and welcome to Nestlé’s Half Year Results Conference and Webcast. I’m Steffen Kindler, Head of Investor Relations. I’m here with François Roger, the Nestlé’s CFO. First of all, sorry for the delay. Apparently, there was a technical issue with the line, and I hope everyone can hear and follow us now well. We’ll add the time at the end, so that we make sure we keep enough time for everybody to ask questions. Now, let’s start. As usual, we’ll start with the presentation and then we’ll open up for Q&A. [Operator Instructions] I will take the Safe Harbor statement as read. And with that, I now hand over to François, please. François Roger: Thank you, Steffen and good morning to all. In the first half of 2016, we continued our strong real internal growth momentum and with limited pricing. Our sales reached CHF 43.1 billion with organic growth of 3.5% and real internal growth at 2.8%. These results are broadly in line with our expectations and leave us well-positioned to achieve our full year guidance. Our trading operating profits increased by 30 basis points, both on the reported and constant currency basis. Our underlying earnings per share increased by 5.7% and our free cash flow is one of the highlights of the first semester with CHF 3.3 billion of free cash flow, an increase of 41% over the same period of last year. Now, I would like to show you the historical perspective of our growth over the last 10 quarters. As you can see, we consistently delivered a strong real internal growth that led to further market share gains. In Q2, for example, we increased or maintained our market share in 57% of geographies and categories. It is 49% increased and 8% maintained. This is the outcome of our investments and commitments made across our portfolio behind innovation, marketing, premiumization and ecommerce. Ecommerce now reaches 4.7% of our sales. As anticipated, the pricing environment remains challenging. We had deflation in developed markets and low commodity pricing overall. We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies. By the way, all data of the -- quarterly data over the last 10 quarters are available in the appendix of this presentation. Let’s now move to the sales growth by zone. This slide includes our globally managed businesses as well. We had good real internal growth across geographies, actually the three zones are at the same level, 2.8 or 2.9, and we had healthy organic growth as well in all three zones, 4.7% in AMS; 2.5% in EMENA; and 2.3% in AOA. As you can see, pricing was negative in both, EMENA and AOA. In EMENA, we were facing deflation in Western Europe, while in AOA we had low pricing in dairy-based categories. We had positive pricing in both Latin America and Eastern Europe. Let’s now move to the breakdown of our growth between developed and emerging markets. Developed markets contributed to 58% of our sales and 42% in emerging market. The contribution of developed market has increased; it used to be 56% 18 months ago. This is largely the result of depreciation of some emerging market currencies. In developed markets, we grew by 1.9% in organic growth which we consider as solid. This is the outcome of our strategy of innovation, premiumization, active portfolio management and mix. We had internal growth in developed markets at 2.6%, which is good. This is actually the highest in many years. We are facing market deflationary pressure across many markets with negative pricing, and we do not expect any improvement in that area. In emerging markets, we had organic growth at 5.4%. This is lower than what we had in the past. In spite of the fact that RIG at 3.1 accelerated, it is actually two times higher than what we had last year, which we consider as a good result in light of difficult political and economic environment. In emerging market, we had limited pricing, mainly as we felt the pressure of commodity pricing remaining low, especially dairy, but we started to take selective price increases towards the end of H1 to offset both currency depreciation and inflation. Now, I would like to walk you through some examples of our innovation, given that innovation is instrumental to support our goals. These are some examples of innovation that are addressing new consumer needs in terms of naturality, organic, higher protein, gluten free. I will start with some innovation that in the natural and organic space, starting with Coffee-mate Natural Bliss. This is a star performer for the Coffee-mates line. It contributes actually to half of the increase of the Coffee-mate line overall, this Natural Bliss, which is a 100% natural coffee creamer. And this Coffee-mate Natural Bliss is having an organic growth of above 50%. Len Cuisine, as you know, we renovated our entire frozen food franchise in the U.S. And the marketplace line which is really addressing the need for organic, higher protein, lower salt, lower sugar and gluten free is growing very fast, 19% of organic growth in the first part of the year. If we move into the PetCare space with Purina Beyond, which is addressing the need for natural pet food as well, this Beyond -- Purina Beyond has increased by 42% in terms of organic growth in the first six months of the year. Some innovation is also science based with nutritional benefits to improve health and Boost Simply Complete is a good example of it. We launched it in the U.S.; we launched it as well in other geographies like Korea, and we experienced an organic growth of 17% for that product. We talked in the past about Wyeth. We upgraded ILLUMA, which is marketed in China, and we had very, very strong growth over the last four years, and it continues. We had an organic growth above 30% in the first six months of the year. In Nestlé skin health, we have a consumer range, which is growing north of -- which is growing double digit, north of 10%. And we brought in the market some breakthrough innovation with Soolantra, which is a new topical treatment for rosacea, which grew by 36%. So, all of these examples show you what we can deliver in terms of innovation and contribute to growth. Let’s now move to the details of first semester by zones, and we’ll start with zone AMS. With sales of CHF 12.1 billion, RIG of 2.5% and OG of 5.1%. RIG and pricing contributed equally to the organic growth but we had different dynamics between the key markets. I will start with North America where we had encouraging RIG, actually the highest in many year which has been supported largely by innovation. I talked a few minutes ago about U.S. frozen food continues to deliver attractive results, Coffee-mate as well. Coffee-mate, I talked about Natural Bliss but we could have talked of flavor extensions as well, which are contributing to the development of the product. PetCare, we mentioned. We had solid results as well in ice cream. Confectionary on the other hand is more challenging, with no category growth overall for in the U.S. Pricing in the U.S. was in the six months very limited. Moving to Latin America, we had positive RIG on pricing. As I mentioned before, we started to pass on some selective price increases to compensate for both devaluation and of currencies and inflation and more specifically in Brazil. Brazil accelerated in spite of the tough macroeconomic environment, and we gained market share during the period. Mexico was our strongest performer in Latin America with broad-based growth across all categories. Product wise in Latin America, we were very satisfied with the development of Nescafe Dolce Gusto Dolce Gusto; and pet food, we talked about it in our Capital Markets Day, both Nescafe Dolce Gusto and pet food were significant growth drivers. Margin-wise our trading operating in AMS declined by 20 basis points to 17.8%, as we had not passed in H1 yet to consumers the full impact of commodity pricing linked essentially to currency depreciation and somewhat inflation, but we started to do it at the end of H1. Let’s now move to EMENA. With sales of CHF 8.1 billion, RIG at 3% and organic growth at 2.6%, all three sub regions contributed to growth. We had a good RIG momentum and we gained market share across the zone. We experienced as well negative pricing overall with minus 0.4%, as it was clearly deflation in the west and we had a little bit of pricing in countries like Russia, Turkey or Ukraine. We are pleased with the results in Western Europe where we had soft pricing, deflationary environment. Country-wise, we were satisfied with our performance in France, in Spain, Portugal, in the Nordics, all of these countries delivered solid RIG. The situation was a little bit more challenging in countries like the UK or Switzerland. We got some good traction from, once again, Nescafe Dolce Gusto, PetCare and the pizza as well. In Central and Eastern Europe, we delivered single-digit RIG and double-digit OG. Counties like Russia, sustained good growth and with the healthy balance between volume and pricing. Category-wise in Central and Eastern Europe, the key contributors were confectionary, coffee and PetCare. Middle East and North Africa were more challenging in what we can qualify as an unstable environment. In spite of that, we managed to deliver both, positive growth in terms of both volume and pricing. The key highlights in terms of categories were soluble coffee and culinary, while dairy remained challenging. Countries like Turkey achieved double-digit growth both in RIG and OG; North Africa achieved solid growth, but the situation was much tougher in the Middle East and most specifically in countries like Saudi Arabia, Yemen, Iraq as well as Israel. Margin-wise, we increased our margin by 70 basis points to 16.9%. We increased our marketing spend during the period, but we managed to increase our margin due to our active portfolio management, better mix, decrease of input cost. Just as a remainder, we expect to close our transaction in ice cream Froneri with R&R at the end of the summer. Let’s move now to zone AOA, sales reached CHF 7.1 billion and RIG at 2.4% and organic growth of 2.3%. We had tough pricing in the zone, especially with coffee and dairy where we experienced low commodity pricing. Yinlu, the Yinlu performance in AOA clearly impacted negatively the overall result of the zone and masked actually very good results elsewhere. We gained market share in AOA outside of Yinlu and India. In China, the food and beverage market overall saw its growth decelerating to basically zero growth. In that context, we had solid performance for products like Nescafe soluble coffee, chocolate with good product renovation and good retail execution, a good example of it is the attractive performance that we had with Shark wafer. Hsu Fu Chi has been soft in the period but we expect an improvement in the later part of the year. And Yinlu is clearly under pressure. We addressed the issue during our Capital Markets Day. We are currently executing a plan in order to address the entire needs of the mix. It will take some time to stabilize though. India was positive as Maggi noodles regained momentum. We have a market share of the noodle market in India, which is now close to 60%; we had 80% before the withdrawal of our product. So, to regain 60% of market share in a matter of months is a good performance, especially so that our distribution reach is only up to 2.3 million stores against 3.9 million stores before the crisis. Our brand trust, which was at 98% for Maggi noodles pre-crisis set down to 8% at the peak 8% at the peak of crisis. And we regained a very good brand trust to 85%. Moving to ASEAN, all five markets accelerated, and we had positive sign with new Nescafe mixes, Blend & Brew, and we are happy to report as well that Philippines is back to high single-digit growth. Sub-Saharan Africa did good result and especially in Central West Africa. Japan, as you know is a fantastic story for Nestlé, and we are very happy with the region there. Margin-wise, we increased our margin by 140 basis points to 19.6% in spite of a material step-up in marketing spend with new launches. We managed to achieve this through strict cost discipline to drive efficiency, lower input cost, most specifically in dairy and don’t forget as well as last year we booked the noodle withdrawal cost at the end of the first period. Let’s now move to our GMBs and we will start with Nestlé waters. The consumer demand shift towards healthier beverages and safe drinking water is clearly contributing to a strong category momentum. We reached an interesting milestone during the period with 16.5 billion liters sold in the first six months of the year. Our sales reached CHF 3.9 billion, RIG of 4.7% and organic growth of 4.2%. These results show a slight deceleration of our growth in developed markets, which is a consequence of negative pricing, poor weather conditions in Europe, and as you -- I think we mentioned that last time, we had tornado that damaged one of our factory in Texas, and we had to stop production there. In emerging markets, we continued delivering double-digit growth, and we were especially happy with the results in Thailand, Vietnam and Egypt, and Latin American countries are all were delivering good results. We continue enjoying a strong performance with our premium brands Perrier and San Pellegrino. Waters increased its margin by 90 basis points to 12.4%. There again, we increased our consumer spend, but it has been compensated by a positive mix by premiumization, rigorous cost management, and we benefited from lower PET costs. And we also experienced some leverage, positive leverage from volume increases. Let’s now move to Nestlé Nutrition, sales of CHF 5.2 billion, RIG of 1.1% and organic growth of 1.3. This is a softer level than what we had in the past, which is largely the consequence of limited pricing. We see distinct dynamics between geographies with the U.S. and China somewhat under pressure and the rest of the countries doing well. I’ll start with the U.S. where we continued to be affected by the certain number of factors, one of them is the fact that we decided voluntarily to exit some regional weak contracts, which are delivering low or no profitability. We had a little bit of difficulties in the transition to new packaging from glass to plastic, and we had some temporary supply constraints to produce pouches which are now being sorted out. So, we are more optimistic for the later part of the year. In China, the demand is clearly slowing. The market itself in China used to enjoy a double-digit growth and is now into low single digits. In our premium on mainstream ranges where we have NAN and S-26 GOLD, we clearly see a softer demand with much more price competition, and the situation is certainly little bit more complicated there, while on the other hand in the super-premium segment where we are represent with ILLUMA, we are growing north of 30%. Overall in China for nutrition, we are slightly gaining market share. In all of our markets outside of the U.S. and China, we grew by 3.5% and we have good performance especially in emerging markets, more specifically in Latin America and Southeast Asia. For Nestlé Nutrition, we increased our margin by 20 basis points to 23.2% with thanks to a positive mix ILLUMA certainly contributing to it, as well as low input cost mainly on the dairy side. Let’s now cover our other businesses, which as you know include Nestlé Professional, Nespresso, Nestlé Health Science and Nestlé Skin Health. Sales for these four businesses reached CHF 6.8 billion with RIG and organic growth at the same level at 4.2%. I’ll start with Nestlé Professional where we had resilient and solid growth across all our food and beverages platforms. With Nespresso, overall the portion coffee market continues to grow and Nespresso within that category is performing well. The VertuoLine drove positive results in North America, and we are continuing to expand on a geographic basis with the opening of 16 new boutiques in the first half of the year. Moving now to Nestlé Health Science, our consumers care franchise is delivering double-digit growth, supported by products like Boost and Carnation Breakfast Essentials. This is mainly in the U.S. Our Medical Nutrition had a good performance as the combination of attractive performance for the allergy line, as well as continued geographic expansion. Nestlé Skin Health, the growth came from combination of real internal growth as well as geographic expansion. We had some recent launches, such as Soolantra for rosacea in EMENA or Epiduo Forte for acne in the U.S. I could mention as well a consumer franchise and self mediation, which enjoyed good growth with products like Cetaphil cleanser or Daylong sun protection. Margins for the other businesses increased by 60 basis points to 16.4%. There, we increased our marketing spend as well, benefited from lower input costs but our portfolio management and core discipline helped to finance increase of margin. Let’s now move to our growth by product groups. I will cover only the product groups that I’ve not covered before, and I will start with milk products and ice cream. We have a slow -- low of growth there, which -- because this is where we book Yinlu, and I talked about the challenges that we are facing there. We had as well poor weather in Europe for ice cream and obviously the low milk pricing is putting some pressure on this category. Prepared dishes and cooking aids, you can see that we had a significant increase in margin, which is largely linked to the one-off -- the fact that we booked last year the one-off cost of the withdrawal of noodles in India. Confectionary, we are experiencing tough trading conditions, both in the U.S. and in some emerging markets, Brazil is one of them. PetCare continues to deliver aggressive growth, little bit of negative drivers on the margin because we did not -- we had not passed on the impact of input cost in some countries, mainly in Latin America during the first half, but we will address that in the second part of the year. Let’s cover now our trading operating profit, which increased by 30 basis points in the first six months, both on the reported and constant currency basis to achieve 15.3%. Our cost of goods has increased by 130 basis points as a consequence of efficiency gains with NCE. NCE the period -- not everything goes to the cost of goods but NCE delivered CHF 660 million of half savings during the period. In the cost of goods, we benefited as well from some favorable tailwinds from commodity pricing as well as our portfolio management and premiumization contributed to it. We reinvested a part of this positive development in the cost of goods in marketing and administration cost from 90 basis points our marketing spend increase by 8% in constant currency during the first six months of the year versus the same period of last year. We invested more as well in R&D. This is an investment in innovation for the long-term, as you know, in order to support our nutritional health and wellness strategy. We talked during our Capital Markets Day of structural saving initiatives. We have now identified eight key initiatives to reduce our structural cost. We have already started to implement four out of the eight initiatives and the other ones are going to follow soon. Let’s move now to our gross margin. It is interesting to see that we improved our gross margin from 47% in 2012 to 50.8% in the first half of 2016. So, it’s a gain of 3.8 points in four and half years, including another increase again in 2016. Several factors explaining that the increase, significant increase in gross margin, pricing, cost efficiencies, input costs, mix portfolio, but we are satisfied to see that because it shows the strength of our portfolio. As you know we have an active view, a dynamic view of our portfolio; it also illustrates well our pricing power including the deflationary environment and our clear cost control focus. Let’s now move to EPS and to our income statement from operating profit to net profit, and I will walk you through the main items, starting with other operating expenses. We had tailwind of 50 basis points there because last year we booked one-off adjustment for hyperinflation in Latin America. Our taxes, we booked one-off non-cash adjustment in Q2, which is linked to deferred taxes, liabilities following a change of tax laws in Switzerland as part of the Swiss tax reforms. This changes the one-off -- once again, a non-cash item, which does not impact our underlying effective tax rate. The decline of income from associates and joint venture is coming from lower reported earning level from L’Oreal on the non-controlling interest has been impacted by the fact that we increased our stake in our Israeli affiliate. Our underlying EPS has increased by 5.7% in constant currency. Let’s move now to our free cash flow generation, which is one of the highlights of H1. We increased our free cash flow by 41% to CHF 3.3 billion. As you know, the majority of our cash flow used to be generated in the second part of the year but we managed to generate an attractive amount in the first period of the year. This is driven by a combination of factors from topline growth to margin improvement, which we covered both of them before; tight control on CapEx, which is at the same level as the last year and another good performance in working capital. You have another illustration of continued focus on working capital on this slide. We gained another 150 basis points in the first part of 2016. These are June data. This is the average of the last five quarters. The values are actually slightly different from the year-end values but what matters is the trend, which is very positive. Again, we’re confident that we can achieve further gains. I would like now to conclude with the summary. We achieved an organic growth at the upper end of the food and beverage industry, and this is -- what we achieved is in line with our expectations. Our strong internal growth has been driven by innovation. There again, we’re in the top quartile of the food and beverage industry as far as volume and mix is concerned. Our pricing on the other hand is at historical low, but we expect it to improve. We believe that we have hit the bottom in Q2. We managed to gain further market share with 57% of our categories and markets increasing or stabilizing market share. We had another strong gross margin improvement which of 130 basis points, partly reinvested in marketing for 60 basis points. Our operating profit improvement has been up to 30 basis points and reflects our focus on cost. And we delivered the strong free cash flow this quarter, increasing 41%, driven by further working capital improvement. As a consequence, we confirm our outlook for the year. We expect some improvements of business in the second part of the year versus the first one, which is linked to innovation that we have already put on the market, which is linked to portfolio management. We expect for example to deconsolidate our ice cream business, after we close the Froneri transaction at the end of the summer. We expect as well to get better pricing in H2, starting with Brazil but it goes beyond Brazil. And we have as well some favorable comps from last year, because we have had no noodle sales in India last year and we had and we had one-off adjustment for skin health in Q3 last year. That concludes my presentation. We’re now moving to Q&A, passing the mic back to you Steffen. A - Steffen Kindler: Yes. Thank you, François. [Operator Instructions] With that we take the first question, which today is going to be Warren Ackerman from Societe Generale. Good morning Warren.

Good morning, Steffen. Good morning, François. It’s Warren here at SocGen. Two questions, please. The first one is can you talk about the cost savings and the margins? I mean, I think you mentioned eight key initiatives; you have implemented four and others to follow. Can you provide maybe just a bit more color on the detail around that and the related costs? And, do you expect margins to accelerate in H2 due to those one-offs dropping out and the JV and ice cream? And then, secondly, in terms of the categories, it seemed to me the two areas of relative weakness were nutrition and other food and bev. I was just wondering whether in nutrition you can actually tell us a bit more exactly what’s going on in China; how deep is the price competition in the mainstream sector; and what’s your outlook on the second half? And the same thing on other food and bev, it seemed to me that everything was quite good but the organic growth was only 4%. So, was Nespresso slower in the quarter? François Roger: Thank you, Warren. As far as the cost saving is concerned, so, as I mentioned, we have identified eight key initiatives; four of them already started. I mentioned during our Capital Markets Day, some of these initiatives, the largest one are obviously the asset intensity increase and the manufacturing side where we’re reviewing our footprint. We expect significant savings as well to come from our consolidation of procurement activities above markets. We are increasing our shared services. We are working in terms of workplace solution, real estate optimization, delayering, and there are some country-specific projects. So, we are really entering to the execution phase now. As you know, these projects have horizon of three years because some of them will take some time to crystallize. But, we have already started to. Don’t expect to get a significant impact of these projects in H2; and even next year, the impact will be relatively limited but it will scale up as we move over time. We are not providing any guidance as far as margin is -- gross margin is concern for H2. That being said, you have seen the trend that we have experienced. So, we continue focusing on portfolio management, premiumization, cost discipline, and so forth. But, obviously, our margin is influenced by other factors that we do not necessarily fully control such as pricing, inflation, deflation as well as commodity pricing. You talked about -- you asked a question about nutrition in China. As I mentioned, the market used to grow double-digit a few years back and it lasted for some time now. The market nutrition -- infant nutrition market in China is -- was experiencing a growth of low single-digit, essentially because of pricing. And our strategy to focus on super premium with ILLUMA is paying off, because we are gaining market share, obviously we are feeling the pressure from the pricing point of view on the mainstream and premium segment where we have NAN and S-26 GOLD. That being said, we are not going go into a price war. So, it’s very clear there. Once again, overall, we are gaining marginally market share in China. So, we are positive on China infant nutrition, even the situation is not -- and the market is not as attractive as it was before but we remain positive. One other information, which is important, we continue to grow as well in volume in H1, which is good news, but pricing is obviously putting some pressure. Pricing is also not only linked to competitive forces, it is linked as well to low commodity pricing, mainly milk. Do you want to add something, Steffen?

There was another question on other categories. François Roger: On other categories, what was the question?

You asked on the slowdown of the other category, Warren. Look, this is basically -- we had good growth but some deceleration versus Q1, and this is also mainly due to pricing. If I had to pinpoint in other category the one that slowed down here probably was Skin Health, whereas all the others still did well. Let’s take the next one that is Jean-Philippe Bertschy from Vontobel. Good morning Jean-Philippe. Jean-Philippe Bertschy: Good morning, Steffen and good morning François. The first one would be on, indeed, on Nestlé Skin Health and Nestlé Health Science. It looks like you had the sequential growth slowdown, as you said probably due to pricing. And the margin is as well under pressure; it was already low in H1 last year, so we now like reaching the 7% level. So, if you can lead us through this nutrition health science -- Nestlé Health Science and Nestlé Skin Health? Sorry. And the second one would be on the confectionary. It was very weak with negative RIG in the second quarter and the pricing remained still high. The margin is under pressures. So, if you can lead us as well? I guess North America is the problem child here, if you want to continue to invest in this market or if you want to let it go? Thanks. François Roger: Okay. Good morning, Jean-Philippe. As far as Nestlé Skin Health and Nestlé Health Science is concerned, these two businesses are clearly accretive in terms of sales growth, and we see an attractive potential further over time. And we are -- they are slightly dilutive on the bottom line because we are in an investment position. So, we are investing in R&D, we are investing in innovation, we are investing in terms of geographic expansion as well. I mentioned for example, we entered Korea with some products; we entered Europe as well for example. The success we have with products like boost into U.S., we have -- it’s so successful, I mean, we grew by 15% in the first half of the year; so, why don’t we do the same in Europe, which is actually what we are doing here as well. So, obviously, this has a cost but the flip side of it is the fact that we are strongly accretive in terms of sales growth. So, it has been the case for some time and it was again the case in the first part of the year. So, dilution is not that bad though, and we need to put things in perspective as well. Confectionary, it’s difficult category. Organic growth is indeed below what -- where were last year. We had positive pricing, which is driven essentially by Latin America and Eastern Europe. RIG was slightly negative, impacted by the U.S. while business has been challenged by a category slowdown with intense competition in the mainstream segment. Brazil as well is -- because we have strong franchise there in confectionary, has been impacted by the contraction of the market for Easter, [ph] which is usually a strong driver of growth during the year in the context of difficult political and economic crisis. Outside of the Americas, we did well, well in Russia and ASEAN. Western Europe was positive. We did well in Germany, Iberia, Italy. The UK is a little bit more complicated, KitKat, you know that this is main product that we have which is global, continued to enjoy mid single-digit growth, driven by AOA and the AMS. Remind you that this is a second largest confectionary brand in the world. So, we remain positive on the category, while our margin suffered due to our challenged U.S. position and economic crisis in LatAm.

Alright, thanks a lot. The next one in the line would be Eileen Khoo from Morgan Stanley. Good morning Eileen.

Two questions from me. The first one is really to follow up on nutrition for China infant formula. We’re seeing a spike up in milk powder prices. Do you expect this to continue; and do you think that puts more pressure on your margin going forward or could we see more pricing coming back to that market? And then, given your strategy of premiumization in China, so, for example, the recent ILLUMA and S-26 upgrades you talked about, how confident are you that the new regulations coming in, will allow you to continue introducing more SKUs at higher price points? So that’s the first question. And then the second one is just on market share really. You gave helpful information on market share momentum in overall Nestlé group. Can you just talk a bit more about AOA in terms of categories, geographies? And within AOA for Yinlu as well, what sort of decline are we talking about here in 2Q? Thanks very much.

Alright, I’m going take the question on the milk prices. So, the whole milk powder and skimmed milk powder prices have been trending up a very little bit from very low level, as to do with bit of reduced milk production and in Latin America also weather conditions impacted, but it’s definitely too early to make larger assumptions here on the future of the dairy prices. The regulation in China, we always said we welcome regulation. Our business is compliant. We have been careful to engage only where we have business in regulated channels. And the government is taking concrete actions to regulate with taxation, with formula registration; and overall, we welcome that because it is in line with our business practices today. François Roger: Just on the second question, the market share in AOA; I don’t have the data for AOA. But I can tell you, in China, we gained market share in 60% of our categories in China. So, it’s -- we consider that it is relatively good. Don’t forget that the market in China is slowing down and the market F&B market is now down to zero growth of Nielsen, which is obviously a concern. But, in that context, we are gaining market share in 60% of our categories. Outside of China, in the Southeast Asia, we did actually very well in all countries. I mentioned the Philippines, where we are back to go double-digit growth, which is good but I could have mentioned other markets where we are doing well overall in Southeast, and in India we are back, which is pleasing.

Okay, thank you very much. Next one is Celine Pannuti from JP Morgan. Good morning, Celine.

Yes. Good morning, gentlemen. My first question is on your outlook for pricing. And can you be bit more specific on where did you take price action? You mentioned Brazil, but as well on --given that you are mentioning deflation in many parts of the world, how confident you are on the step up in pricing for the second half of the year? And I’m also putting back in the context of your guidance, which implies a step up in organic growth in the second half of at least 1%. So, if you could comment on that given that as well [indiscernible] that it is overall pricing and outlook, how you balance that for the second half of the year? My second question will be a bit of the same on margin. It seems to me that you had mentioned that the full year will be H2 weighted, and I took that was as well in margin comment. I think last year you had a hit on margin. You had mentioned the specific issue that hit margin last year. Is that a correct assumption to believe that H2 margin will accelerate? François Roger: Good morning, Celine. Regarding pricing, yes, I am confident on the fact that we had hit the button in Q2 and that this is going to increase because we have put through price increase in some markets. I mentioned Brazil, because we have discussed Brazil overall last couple of quarters but it goes beyond Brazil. I mean, we have done it in other markets like Russia. There would be some pricing coming in, in other markets, like even if you take the UK, because with the devaluation of 15% of the currency, we have two main lines in the UK, which is confectionary and coffee, and we import raw material. So, with the 15% devaluation over time, we need to pass on some of the price increase -- raw input cost increase that we have into currency depreciation back to consumer; the timing of it is to be reviewed. We have also started to see overall some increase of commodity pricing. So, overall, it depends from one category to the other. So, is it going to last or not, there is always a time delay between what happens in the commodity market and what is passed on to consumers. But yes, we are confident and think that pricing is going to improve. To what extent and how long is it going to last? Okay, we’ll see. I am more concerned I would say on the impact that pricing may have on real internal growth possibly, because there is always some elasticity which over time tends to ease off. But in the short term, when you increase prices, obviously, consumers have a tendency to go down in terms of category. That being said, we can address it, because for example consumers who are in the mainstream category, they may after price increases, move into affordability or what we call PPP, so they can downgrade their purchasing a little bit. So, we should be able to recover most of it, but let’s see how it goes because elasticity is always unsure. Regarding margin in H2, once again, not going to provide any guidance. You saw what has happened. We improved our margin regularly over the first last four and a half years, not saying that it’s going to happen in H2. You mentioned a certain number of factors that have happened last year that move in that direction, but I mean margin is a consequence of many factors starting from pricing, going to raw material input cost, inflation, deflation, mix and so forth and premiumization. But, you can see through what we do that improving our gross margin is certainly something we are working actively upon in all dimensions, the ones that I mentioned from pricing to cost and premiumization, portfolio management and so forth.

Okay. Next one is Martin Deboo from Jefferies. Good morning, Martin.

Good morning, everyone. I’ve actually got a question that relates to Celine’s on H2 pricing. I’d really like to push you a bit harder on this, if I may. If we just look at the shape of H2, simple arithmetic tells you’ve got to do it close to 5% organic growth in H2. You get -- on the volume RIG side, you get the benefit of lapping Maggi but on the other hand you’re up against a tougher comp. And François-Xavier just said, there could be some negative elasticity from pricing. So, it would seem that you’re going to have to do a lot better on pricing in H2. And the two things that you’re calling out are one, the reversal of the Skin Health provision, which you sort of get for free, so as to speak. I’d be grateful if you could remind us what the impact of that is on H2. But it would seem to me that pricing in Brazil has to be a very big component of the H2 price move. And to come back to the debate we had at Q1, you were arguing at Q1 that you were late to put pricing through in Brazil because of the different dynamics of dairy, and also the effects of hedging. But, you’re in a position in Brazil where you’re coming late to the pricing party at a point when the real is starting to appreciate again and competitors might be taking a more benign look at pricing. So, I guess the question I’ve got to ask is, just what’s the risk that you can execute your pricing strategy in Brazil in H2, because it seems to me to be key to the whole thing? That’s the question. François Roger: Martin, thank you for your question. The pricing execution, it’s already in the market, because we did it in May and June. So, it’s already there. So, we need to see what the impact is especially on RIG, but we have already put it through. Okay, we can always revert it, but there is no intention to do that. So, we are sticking to it. You are talking of H2, indeed, we need to achieve our guidance, which we reiterated; we need to be around 5% of OG in the second part of the year. This is not only linked to pricing. You mentioned some of the items such as the comps, Nestlé Skin Health, the adjustment that we did in Q3 last year, as well as noodles. This contributes to about 50 basis points of improvement in the second part of the year between these two components. You have pricing, which is taking some share of it. Innovation is another component on portfolio -- in innovation, because we launch a new products; and portfolio management as well. Froneri, for example, we expect to close at the end of the summer. So this will slightly contribute to it as well. So, it’s a combination of factors. We have clearly identified the building blocks for the acceleration of our sales with always -- there are always some risk. One of them, as I mentioned is the elasticity that is coming from some pricing. We talked of Brazil, but it’s not only Brazil and we put thorough price increases in countries like Mexico and other Latin American countries, and I even mentioned one European country when it will come over time.

Okay, thanks a lot. Next one is Jon Cox from Kepler Cheuvreux. Good morning, Jon.

Hey, good morning guys. Thanks for taking the question. And congrats on that cash flow statement, looked very impressive given the environment. But, looking at the volume growth in Q2, seemed to be a clear deceleration, and that appears to be focused on the Americas. Do you think that was just really maybe the volume growth in Q1 was pulled forward by some countries expecting prices to increase, i.e. Brazil? Because if you look at the Americas region, volume growth seems to be around 2% after being 3.5% in the first quarter. That’s a pretty sharp slowdown. And in Europe as well, we got a 40 basis-point slowdown in volume growth Q2 versus Q1. So, a volume question for you. What was behind that deceleration we saw in the quarter? And then, the second question is just on NCE. Did you actually say the savings in gross margin that was about 60 basis points? Thanks very much. François Roger: Thank you, Jon. I don’t see really a deceleration of real internal growth in Q2. Don’t forget that Q1, we benefited, as all our competitors, from the fact that 2016 is a leap year, so which obviously there was one more day of consumption. So, everybody benefited from it. But, I don’t see a clear deceleration. We provided some quarterly data on page three. If you look at the graph, you don’t see -- it’s a marginal deceleration but there is not much to see. There is a little bit of an increase in Q1, because of the leap year. So, I don’t -- I’m not reading it as -- with any concern. NCE, what is mentioned the figure of CHF 660 million of saving and half savings in H1. Not everything flows into the cost of goods sold, because NCE is not only about manufacturing efficiency, it’s about efficiency overall. So, some of it goes to G&A and to -- it can even impact marketing spend for example. So, this relates to the figure that we gave at our Capital Markets Day, where we had saved about CHF 1.5 billion a year -- per annum over the last couple of years. So, the momentum continues. And so, we are satisfied with what we achieved again in H1.

So, we carry on with Adam Spielman from Citi. Good morning, Adam.

Good morning. So, I have two questions, the first one is on China. You said that food and beverage got to zero growth, if you measured it in Nielsen. I am interested though that if you include ecommerce, what you think the growth rate is China in 2Q or first half? And whether you still think, this is permanent move down? I guess the sort of the question is also relating to the outlook for China food and beverage including internet sales. That’s one question. The second question is similar, but talking about developed markets. You talked about very high; good RIG in developed markets in H1, and particularly you said that innovation is driving better RIG. And I was just wondering if you could sort of isolate that. And also the question relates to the future. Is your -- what is the one-off to this innovation; are we seeing a permanently better innovation pipeline, which should lead to I guess permanent improvement in RIG from that element in developed markets? Thank you. François Roger: Thank you, Adam. I’ll take the second question and then let Steffen answer to the first one on China. On the second question, innovation, well, innovation is some of many different initiatives on project and product. But just to give you some hints, because we track innovation very closely, you remember that we have about a third of our products which did not exist or were not on the shelves three years ago. And we measure innovation on a permanent basis. And innovation is not marginal innovation, just changing the label and the bottle or whatever. It is reformulation, it is really bringing new real product in the market. And we see that out of our growth on -- because we track it on a monthly basis, we have about two-third of our growth which is coming from the base business, which is growing by itself, and about a good third which is coming from innovation. And there innovation, I’m even taking what we launched this year and what we launched last year, so probably last 24 months. So, we have a real momentum there which is largely the result of first of all our strategy. We have a strategy which is driven by permanent innovation and renovation. And we have as well a strategy where we invest heavily in R&D. We invest heavily as well in marketing spend. Some of this innovation can take different shapes and form, as I mentioned in the slide that I put and that added because I wanted to give you the further highlight and further color on what we can do in terms of innovation. And Steffen, I’ll let you answer the question on China.

Yes, the question on China market share, really it’s difficult to say if ecommerce is included here. What we see is that for Nielsen data on MAT in 2016, the market has come down from previously about 3% to now really zero. The inclusion of ecommerce is something that we’re still working on. And we think a part is in but we are not confident it’s all in. So, back to your question, including ecommerce, the market might still be slightly up. Growth by category is driven by coffee and Shark wafers but as we said before Yinlu is soft. And as François also explained before, we’re turning the negative trend of some prior years. What is also interesting to mention for China is that our market share is improving in more than 50% of our sales, exactly in 66% of sales, we are improving market share in China, which I think is an interesting data point. With that… François Roger: I would just add that in China, our ecommerce is increasing very fast as well. So, we are very present there. So, it was increasing by more than 80% in the first half of 2016 versus the same period of last year. So, we are growing very fast. We are really investing a lot of resources. We did -- you heard about it, some specific promotion for example with Alibaba in the context of our 150th anniversary. So, it’s a very strong momentum as well. That bring said, the traditional market, which will present the very vast majority of the market, which is covered by Nielsen, is actually showing no growth in the market.

Okay. With that move on to Patrik Schwendimann, Zürcher Kantonalbank. Good morning, Patrik.

Good morning, Steffen; good morning, François. What tax rate do you expect for the full year and then in the midterm? That’s my first question. And second question, why was the nutrition margin not better despite significantly lower dairy prices, and what do you expect here for the future in terms of the margins for nutrition? Thank you. François Roger: Thank you for your question, Patrik. On nutrition, the margin improved, which is good. Obviously, we benefited from low commodity pricing but on the other hand we had the pressure upon pricing on the mainstream and premium in China, which is a reason why the net impact is positive, but let’s say it could have been better, obviously if we had not to adjust somewhat pricing down as well for the mainstream and premium lines. On tax rate, we don’t provide any guidance on rate. The only thing I can mention is the tax rate has been -- underlying effective tax rate has been around 27% over the last couple of years. The adjustment that we took in Q2 is a one-off adjustment, which is linked to a change of tax rules in Switzerland, which does not impact our underlying ETR.

Okay, thank you. That brings us to the next caller Alain Oberhuber from MainFirst. Good morning, Alain.

Good morning, Steffen; good morning François. From my side also regarding China, a question. You mentioned that Hsu Fu Chi had some problems in Q1 and that should improve in second half. Could you elaborate a little bit on that? And the other question is regarding Yinlu. Are we still expecting an improvement only by 2017? And then, the second question is regarding the ice cream deconsolidation. What could we expect after deconsolidation on the margin, how much will that contribute for the second half, and on annual basis how much could be the positive impact from the deconsolidation of your… François Roger: Alright. Good morning, Alain. Hsu Fu Chi it’s not that they did poorly in H1, but it’s a business which is fairly seasonal, which is very lean to festive seasons and so forth. And we know that because of that, we will be in a better position in H2 because some of these festive seasons are moving a little bit during the year as well. So, it’s more I would say technical issue in terms of calendar. Yinlu, as I said, it will take some time. Yinlu is in negative territories and we are not satisfied with it. This is a strong asset. We have clearly a very good distribution platform in the beverage space, nationwide in China, which is something that is not common. We have a good innovation pipeline. We have a good track record as well as of products. Shakissimo, the ready to drink coffee that we launched recently, shows very encouraging results. And we are well-positioned as well because we have a significant presence in a growing segment, which is a plant protein beverage. So, I think that the Company has a certain number of assets; we need to fix the number of issues. We are also in categories which are not that attractive any more. One of them is congee. And we are heavily dependent on one-third category of plant protein, which is more specifically peanuts. So, we need to improve in terms of execution capabilities. So, we have already started to address clearly most of these issues through innovation. We brought in some people from outside as well to help us in the execution capability. So, we are actively working on Yinlu, which will take some time. Will we see some results in 2017, probably later part of 2017, but it’s going to take a little bit of time. Ice cream deconsolidation, it will have some impact. We should deconsolidate at the end of the summer. So, it will have some impact in Q4 more specifically. So, the impact in 2016 will be negative and there will be some impact as well for three quarters next year, but we don’t provide any quantification of evaluation of this impact. But this is start of what we record on a normal basis as part of portfolio management. We had the same for example this year with the deconsolidation of Davigel that took place in France last year. So, this is the part of what we do regularly.

Okay. Next caller is James Edwardes Jones from RBC. Good morning, James.

Good morning, Steffen. Good morning, François. Two quick ones, if I may. First of all, you called out the increase in R&D. It was only up I think about 10 basis points from what I can see. Given the actual and intended changes in the portfolio, is that going to increase materially going forward? And secondly, have you got anything say on promotional efficiency? It’s obviously been -- some of this has been talked about a bit over the last year or two. And I wonder if that could partly be a factor behind the relatively subdued sales growth but big increase in gross margin? François Roger: I’ll take the first question on R&D; it’s increased -- indeed we increased by 10 basis points. We expect to continue investing significantly in R&D. We do spend more than our competitors, and we spend about CHF 1.7 billion a year, so which is significant. Material increase in the future, I would not say material. We are targeting efficiency there as well. I’ll let Steffen answer the question on efficiency of our promotional spending. Efficiency matters as well in R&D. And R&D can take different shapes and form as well. We live in a world where part of the R&D is coming from collaborative way of working. So, we need to partner a lot with other companies. A lot of innovation is also coming from small companies, which we address through participation on corporation with VC partners and so forth. So, it takes different shapes and forms. Does not necessarily mean that everything we do goes to the P&L, some of them could be equity investments as well, as we have always done. We have had -- we have been the first one I think to invest heavily in external innovation as well.

Yes. For promotional efficiencies, James, this is something Nestlé has been doing since I can remember actually also in the operational business. There are several things you can do. There is the classic marketing, mix modeling where you see uplift of your trade or marketing spend and you can pinpoint it very closely. It’s part of our operational processes. And in specific cases, we also go on the project bases, like in the United States we had a very broad study that was called strategic pricing where we used statistical relation models as part of our relaunch of the frozen portfolio especially in pizza. So, there’re several tools. And yes, we’re aware and we use them all that we feel we’ve done it always, and it’s part of the DNA. So, this is not necessarily changing. Alright. That gets us to the last analyst, and then we have two more journalists in the queue. So, first, Jeremy Fialko from Redburn.

Hi, good morning. It’s Jeremy Fialko, Redburn, here. I guess following up on James’s question, more of a question on the marketing and the advertising side of things. Clearly, you’ve seen some pretty strong increases in this over the course of the last few years, yet your RIG has been I’d say relatively stable, admittedly in a slightly slower market. So, the questions are, how satisfied are you with the efficiency of your marketing spend? And then, what initiatives have you got ongoing to improve the efficiency of the marketing spend; is that one of the eight areas that you referred to earlier on in the presentation? Thanks. François Roger: Okay. Thank you, Jeremy. Indeed, our marketing spend has been increasing significantly, if I just take the last two, three years. Last year, we increased our marketing spend by 12% on a constant currency basis. This first half, we did it with 8% additional increase. And I would say this is what drives the fact that we are delivering a strong RIG, which is at the very top end of the industry. So, we are translating that into market share gains as well. Efficiency is on the top of what we aim at doing. This is not something -- this is not part of the eight areas, because this is something that we have been addressing overall always over time, which -- it has a lot to do as well with higher investment that we do in digital, in the digital marketing, and we try to cap now a little bit more what we do in the core marketing spend, not that it is not efficient but people continue to watch TV and read magazines and look at billboard in the street, but it is true as well that the efficiency is quite strong on the digital space. So, this is not part of the eight-area but this is clearly area of focus.

Alright. Then, the next question is Ralph Atkins from the Financial Times. Good morning, Ralph.

Hi, good morning. Two questions, firstly, back to the deflationary pressures which have obviously had quite an impact on the organic growth rate. You mentioned you’re confident about pushing through some price increases in the second half, but you mentioned Brazil and Russia. It seems the problem seems to be focused largely on Continental Europe. What do you expect by way of price development in Continental Europe and how will that impact on your growth projections? I mentioned Continental Europe, obviously excluding the UK. But, second question is what impact do you expect the Brexit vote to have on UK, in terms of UK sales but also on your future investments in the UK? Thank you. François Roger: Okay. Deflation in -- good morning, Ralph. Deflation in Continental Europe, we are in negative territories there. So, our pricing is negative, reflecting global deflationary environment. And I mentioned earlier that we don’t expect any improvement there. So, it’s not improving. The deflation is probably even accelerated little bit further as far as the food and beverage industry is concerned because there has been some consolidation in terms of retail in some markets, France is one of them for example. So, it doesn’t have -- and we don’t see any improvement. UK, I covered earlier. The Brexit for the UK, we don’t see any direct impact in the short-term, apart from the fact that obviously the translation of our UK business into our Group accounts has reduced a little bit because the currency has devalued by close to 15% against the Swiss franc. So, this is the contribution of our UK business, which is sizeable, will be lower on the total Group. In terms of transaction, we were hedged in terms of imports and exports for certain period of time. So, we don’t expect any significant impact on our business in the very short-term. As I said earlier, obviously given that we import a lot because of two main categories are made of products which are imported, cocoa and coffee, we will have to reflect that in pricing going forward. We don’t have a negative view of the UK. We have actually invested in UK, because we have built one of our -- one of the few lines of Nescafe Dolce Gusto, it was before the Brexit but in the UK. So, we continue to be committed to the UK as a market in terms of consumption and as a place to -- it has some room to play even within Europe, in our industrial setting for example.

Okay. Final question is from Silke Koltrowitz from Reuters. Good morning, Silke.

Yes. Hello, good morning. And so, I have two small questions on details, like, so, your organic growth in the second quarter was the weakest since when, can you tell us that? Because it’s given three years back, but I think it must be longer ago than that; is it the weakest ever even? And then on China, and again on China, how was the Chinese performance of Nestlé? You talked about the market in general it was flat. Was Nestlé sales in China flat in the first half or was it like slightly up? And then may be just on your dividend policy, can you tell us, just so like committed to raising the dividend each year -- every year? Thank you very much. François Roger: Good morning, Silke. Organic growth in Q2, I don’t know the history, because I joined the Company only a few quarters ago. But again, we could have a look. But, anyway, we don’t manage really the business on a quarterly basis. Given quarter in itself doesn’t mean too much. You take several quarters, it shows a trend, which is a reason why in one of our slides we’re showing the historical prospective over 10 quarters. We see some slow down, which is not linked to volume and mix, which is much more linked to pricing, which is once again the consequence of the deflation on the environment as well as low commodity pricing. But, don’t look at one quarter in an isolated way; rather look at the time perspective. In China, we were negative in Q2, that being said we gained market share. It might be a little bit counterintuitive because if I said the market is flat, the market is flat with Nielsen data. There is always a little bit of time lag between our sales, which are down to distributors and market share recorded, which are consumer market share. So, we were negative in Q2. Our dividend policy, we have increased our dividend over the last 30 years and we value shareholder return and shareholder remuneration. The dividend is a significant part of our cash flow. It was close to two-third of our and cash flow generation last year. We have had, I would not say a general dividend policy, but we have maintained the dividend in Swiss francs, which was, I would say a relatively bold move over the last two years, especially when the Swiss franc revalued last year. But we’re committed once again to maintain good level of shareholder remuneration.

We have not reduced the dividend in the last 70 years, so that noblesse oblige. That brings us to the end of the call. Thank you very much for your attention today. And we talk to you again on the event of our nine months earnings results. Thank you very much. Bye-bye.